The Truth About Dealer Financing Profits
Yes, car dealers often make significant money through financing - sometimes more than they make on the actual sale of the vehicle. Dealerships have multiple ways to profit from financing arrangements, and understanding these can help you negotiate better terms.
While dealer-arranged financing can be convenient, it's important to recognize how dealers are compensated so you can make informed decisions about your auto loan.
How Much Do Dealers Make on Financing?
Dealer financing profits vary but typically include:
- Interest Rate Markup: 1-2% added to your APR (earning $500-$2,000 per loan)
- Flat Fees: $100-$500 per loan from lenders
- Backend Products: 50-100% markup on extended warranties and insurance
- Volume Bonuses: Additional payments for meeting lender quotas
How Dealers Profit From Financing
Interest Rate Markup
Dealers add percentage points to the buy rate (the rate the lender actually approved) and keep the difference.
Example: Lender approves 5%, dealer charges you 6.5%
Dealer Reserve
Flat fees paid by lenders to dealers for bringing them business, typically 1-2% of loan amount.
Example: $300 on a $30,000 loan
Backend Products
Extended warranties, GAP insurance, and protection packages with 50-100% profit margins.
Example: $1,995 warranty that costs dealer $800
Volume Bonuses
Additional payments from lenders when dealers meet monthly or quarterly loan quotas.
Example: $10,000 bonus for 50 loans in a month
How to Get the Best Financing Deal
1. Get Pre-Approved Elsewhere
Secure financing from your bank or credit union before visiting the dealer to have a rate to compare against.
2. Negotiate the Price First
Agree on the vehicle price before discussing financing to avoid package deals that hide costs.
3. Ask About the Buy Rate
Request the interest rate the lender actually approved (without dealer markup).
4. Read All Documents Carefully
Review the financing contract for any added products or fees you didn't authorize.
5. Consider Paying Cash for Add-Ons
Backend products are often cheaper if purchased separately after the sale.
Loan Comparison Calculator
Average Dealer Financing Profits
| Interest Markup | $500-$2,000 |
| Dealer Reserve | $100-$500 |
| Backend Products | $800-$2,500 |
| Total Per Deal | $1,400-$5,000 |
Red Flags to Watch For
- "What monthly payment can you afford?"
- "This rate is only good today"
- "The bank requires this warranty"
- "Your credit isn't good enough for better rates"
Best Financing Alternatives
- Credit Unions
- Online Lenders
- Bank Direct Loans
- Manufacturer Financing